Facing an unprecedented amount of competition and economic pressure, single-store pet retailers must be nimble in leveraging their unique strengths or fall by the wayside.

It’s tough to be a single-store operator these days.

Facing an unprecedented amount of competition and margin pressure–and lacking the economies of scale that chains enjoy–small, independent retailers must develop the right strategy for attracting and maintaining a loyal customer base, as well as maximizing every sale. The alternative, as an unfortunate number of single-store operators have discovered over the past several years, means going out of business.

While the pet industry at large continues to show modest growth, there are clear signs that success in this market is not homogeneous among all retailers. In fact, even as the national big-box pet stores and certain regional chains across the country expanded significantly from 2007 through 2012, the total number of pet store operators actually declined by eight percent over those five years, according to a December 2012 industry report from IBISWorld, a Santa Monica, Calif.-based market research firm.

During that same period, according to the report, the number of individual pet store locations in the U.S. declined by a little more than four percent.

These developments present a stark contrast to the pet retailer boom that took place from 2003 through 2007, when the number of store operators increased by more than seven percent, and the total number of pet store locations increased by 11 percent, according to IBISWorld. Not surprisingly, as the numbers illustrate, the tide turned for many pet store operators between 2007 and 2008, when recessionary forces gripped the economy.

One does not have to rely on statistics to discover how the past five years have gone for single-store operators, though. Those who observe the industry closely have seen plenty of anecdotal evidence that things have been tough for these pet retailers. Still, the picture painted by the experts in the trenches is not nearly as bleak as the raw data would imply.

“Sure, overall, there’s not as many single-store operators as there were five years ago,” says Bob Merar, president of General Pet Supply, a Milwaukee-based pet product distributor. “But from what we’ve seen, the good single-store operators are not in decline. They’re doing a good job. Their stores are attractive, clean and inviting, and they’re bringing in customers.”

Bo Nelson, founder and president of Wholesalepet.com, a Richmond, Va.-based online pet product wholesaler, similarly witnessed what he describes as a “slight dip” in single-store pet retailers between 2007 and 2010. However, he says that this has been followed by an uptick in new store openings. It is a trend that Nelson says has recently gained momentum. “Over the past six months, I’ve spoken with at least a dozen new single-store retailers,” he notes. “In 2011, I talked to maybe 10 all year. So, the rate of new store openings is picking up.”

As Nelson points out, the period between 2007 through 2010 proved particularly difficult for small, independent pet retailers, many of which succumbed to economic pressures before getting a taste of any subsequent rebound. Such was the case for Dan Headrick, former owner of high-end, nutrition-focused Wag Pet Boutique in Raleigh, N.C.

“Around the middle of 2008, we still had the same foot traffic, but we started seeing signs of customers pulling back on high-margin purchases like toys, and high-end collars and leashes,” he says. “And by the fourth quarter of 2008, when the real financial crisis struck, our sales seemed to almost instantly drop about 40 percent. We found ourselves with a pretty good size store, with food sales maintaining, but high-margin merchandise sales just tanking. We held on as long as we could and made it through the second quarter of 2010 before we just had to get out.”

Single-store operators that were able to weather the years-long economic storm did, for the most part, find some relief eventually. “About three years ago, we saw a sharp decrease [in sales],” says Mike Hoffer, owner of Hoffer’s Tropic Life Pets, a 34,000-square-foot full-line pet store in Milwaukee. “But last year, and so far this year, they’ve been on the rise.”

The rebound came a bit more quickly for Whitie’s Pets in Fresno, Calif., another large-format (25,000-square-foot) full-line retailer. “Like everyone else, we felt a crunch there at the beginning of the slump,” says John Shafer, the company’s vice president. “But after about a year, things began to recover, and now we’re doing nicely at this point.”Of course, both Whitie’s Pets and Hoffer’s Tropic Life Pets were well established by 2007 (they were founded in 1943 and 1972, respectively), so they were in a relatively strong position to fight through the recession. But the owners of Dee-O-Gee in Bozeman, Mont., found themselves in a very different situation when the economy went from bad to worse in late 2008. As Josh and Holly Allen planned the opening of their 2,000-square-foot dog- and cat-focused store earlier that year, they had no idea what was coming down the pike.

While the state of the economy over the past five years has been an obvious source of

pressure for single-store retailers, it would be a mistake to view this as the sole factor

in thinning the herd.

“At that time, the economy was great,” says Josh Allen. “It was all green lights and go-ahead. So, when we signed the lease on our location, there were no obvious indications that [the economy] was about to go over a cliff. So, we built out the store, filled it up and opened in August of 2008. Then in October the whole thing went in the pot.”

Interestingly, Allen says that the impact of a souring economy ultimately did not have much of a discernible impact on Dee-O-Gee’s early fortunes. “Those first few months after opening your doors, it’s slow, regardless,” he explains. “So it’s not like we saw a drop-off in sales after October. We hadn’t even experienced the boom; so when the bust happened, it was just part of the start of our business. There was actually more growth than I initially anticipated, and that trend seems to be continuing for us.”

Prevailing PressuresWhile the state of the economy over the past five years has been an obvious source of pressure for single-store retailers, it would be a mistake to view this as the sole factor in thinning the herd. These retailers have also faced mounting competition from a number of directions.

According to Headrick, a more crowded marketplace proved to be a particularly difficult development for Wag Pet Boutique, which faced very little competition when the store opened in 2003—thanks to what was, at the time, a relatively unique focus on super-premium foods.

“Small competitors started coming at the market from different angles,” says Headrick. “There were small treat bakeries that were gradually adding on foods and other items. There were groomers who were changing their business model by adding merchandise and super-premium food and treats. Then we had a bigger competitor from a nearby town that opened a location in Raleigh.

“At first, the competition we were most concerned about was from the big-box chains, which were adding boutiques within their stores. And then we started seeing grocery stores adding some lines of higher-quality foods. So we knew that the space that we were competing in was attractive to other retailers, and we saw competition growing up all around us.”

Nelson has also noticed more non-specialty retailers moving into a space that was once reserved for small, independent retailers. “When you walk down the pet aisle at Walmart, Target or a grocery store, you will see a lot more green and natural products than you did five years ago,” he adds.

Despite the increased focus that non-specialty retailers are placing on pet products, as well as the continued growth of Petco and PetSmart, Merar says that regional pet specialty chains are proving to be the more formidable competitors for single-store retailers.

“Regional pet chains absolutely are a threat to single-store retailers—more of a threat than any Petco or PetSmart would be,” he says. “[Mahtomedi, Minn.-based] Chuck and Don’s is a chain that most people still think as a neighborhood pet store. They don’t think of them as a 24-store chain. So, when you go to the store in Minneapolis, you think that’s it, because it operates like a single store. It has the feel of an independent pet store—which it is, but it has the buying power of all those locations.”

Like Merar, Hoffer does not believe that Petco and PetSmart are the main competitive threat to single-store operators. “[Big-box retailers] have almost been a boost for us,” he says. “Many shoppers go into those stores and are unimpressed by the caliber of help they have, the quality of their animals and the depth of their selection. Even their pricing isn’t that great.”

Shafer echoes this sentiment. “All [Petco and PetSmart] have done is ramped up the research and development in this industry,” he says. “They’ve ramped up the top-of-mind awareness of pets and how we look at them. They’ve helped the industry to grow and become more sophisticated—and what’s wrong with that?”

When it comes to ranking the main competitive threats to single-store retailers moving forward, Merar says that online retailers should be at the top of everyone’s list. “I think that the biggest fear that the single-store operator should have is not the regional chains, not the Petcos and PetSmarts, but really whoever on the Internet figures out home delivery,” he says, noting that Amazon is currently testing same-day delivery in select cities. “That is what is going to drive the industry in the next 10 years, online retailers that can provide instant gratification to consumers.”

Survival SkillsAs single-store retailers like Whitie’s Pets, Hoffer’s Tropic Life Pets and Dee-O-Gee are proving, success is possible. The key is having the flexibility to adjust to shifting market dynamics. It is a lesson that some retailers have learned the hard way.

“What a small [retailer] needs to understand is that from the get-go, things will change,” says Headrick. “We had a formula that was working for us, until it stopped working for us. For a small operator to withstand these types of upheavals, you have to be prepared to change. We discovered that we weren’t prepared for the kind of change we needed.”

Luckily, smaller retailers are particularly suited to making necessary changes on the fly, says Mike Gatti, senior vice president, member relations, for Washington, D.C.-based National Retail Federation. “The advantage a small retailer has is that it can adapt faster than the bigger guys and stay on that leading edge,” he says. “But anytime that you are fortunate enough to find something that is going to be a real popular product or service, you know it will eventually go mainstream and you will have a challenge competing. So, the minute your specialty goes mainstream, you have to start looking for the next new thing to offer your customers.”

For single-store retailers, the adjustments needed to maintain success do not necessarily have to be as drastic as finding the next big product category. They can be as subtle as a tightening the reins on inventory control. Both Shafer and Hoffer say that they responded to a dip in sales by simply taking a more conservative approach to placing orders with their suppliers. “We just pulled things back a bit and watched our spending,” says Shafer. “I wasn’t buying as freely; I was watching my quantities very closely. On my restocks, I let my shelf minimums run down a little. I made sure I wasn’t running out of anything, but I wasn’t taking advantage of any big buy-ins.”

“I should have looked at [my inventory levels] years ago, but I’ve always liked to present a nice, full shelf,” adds Hoffer, noting that he has noticed a variety of neighboring retail businesses also drawing down their inventory levels. “I have a 6,500-square-foot storage area for overstock, which I don’t utilize as much anymore—everything goes right out onto the floor. I find that I’m ordering the same things every week, but my distributors have enabled me to buy that way. And they are delivering my orders within two days.”

Even as they look to rein in spending, small pet retailers must still be able to recognize and take advantage of opportunity when it comes knocking. For Hoffer, such an opportunity came in the form of building a closer relationship with one particular manufacturer.

“It was like a godsend when I started working closely with Aqueon,” he says. “They saw the same [negative] trend that I saw in my store, and they did something about it. They started offering some deep discounts through my distributors, and I took advantage. I was able to plot out a six-month buying program focusing on all of their products, so I knew well in advance what I would be buying. This allowed me to start promoting our upcoming specials in advance, which I usually couldn’t do before. It really helped improve our business.”

While running Dee-O-Gee, Allen has also learned that the ability to adjust a store’s business model is critical to its success, even if it is not directly in response to the prevailing economic conditions. For the Big Sky Country retailer, adjusting meant redirecting the stores focus away from more discretionary items and toward commodities like food. “We came to realize that having a large selection of dog food in your store just brings more customers in every month,” says Allen. “So we changed from trying to have a really big selection of products like toys and collars, and we’ve expanded our food selection a couple of times since we’ve opened. It has been a matter of trial and error in figuring out the model that is successful.”

While a focus on pet food will certainly drive traffic into a pet store, the relatively low margins associated with these bulky products can make this strategy challenging, to say the least. This makes it essential for retailers like Dee-O-Gee to find ways to drive higher-margin sales. “From the get-go, we implemented a rewards program where customers earn points based on their dog food, cat food and grooming purchases,” says Allen. “Then we email them a coupon that they can use on their regular purchases, and hopefully they also pick up something else that they will keep coming back for, like a supplement.”

More recently, Allen decided to try a new method of maximizing each food purchase. “I had some rolls of custom stickers made with our branded logo, which we put on specific lines of dog food. They say, ‘Buy this bag and get $5 off a dog toy today.’ Something like that provides the customer with an incentive to add to their dog food purchase, but it’s an urgent thing because they can only do it right there when they’re buying their food.”

Of course, the ability to deliver a high level of customer service is paramount for all independent pet specialty retailers, but it is an area in which Gatti says single-store operators can particularly excel. “Success revolves around building a relationship with the customer,” he says. “This is something that small retailers can do better than any of their competitors, even regional chains.”

This is a point that clearly has not been lost on a veteran single-store retailer like Hoffer. “Customers like the fact that when they come into my store, the owner is there to greet and shake hands with them,” he says. “And they love it when you recognize them.”

And customer satisfaction is what will ultimately decide a small, independent pet store’s fate, says Shafer. “Success is all about customer satisfaction,” he explains. “It all trickles down from there. If I take care of that right, everything else will fall into place.

“There are a lot of ways to get the job done. There are a lot of styles of delivering pet goods—from simple dog food stores to full-line retailers like me—and any of them can succeed. I’ve watched them come and I’ve watched them go, and if they failed, it’s because they weren’t taking care of the customer.”